Obama, Hu discuss yuan on nuclear summit sidelines

President Barack Obama repeated his call for more yuan flexibility during a meeting on Monday with China's Hu Jintao, deploying careful diplomatic language while Beijing stressed dialogue.

A later report from China's official Xinhua news agency reflected a stiffer tone from President Hu, but in Washington there was a deliberate effort by both sides to stress the cordial nature of the talks.

The president reaffirmed his view that it is important for a ... sustained and balanced global economic recovery that China move toward a more market-oriented exchange rate, Jeffrey Bader, a top White House adviser, told reporters.

The Obama administration wants to avoid embarrassing Hu over the yuan currency while he attends a nuclear security summit in Washington, shrugging off domestic political pressure for stern words against Beijing.

The U.S. Treasury recently delayed publication of a report that politicians had urged Obama to use to name China a currency manipulator, paving the way to eventual official action.

Months of tensions -- over trade, Internet freedom, Taiwan and Tibet -- placed heavy expectations on the 90-minute talks on the sidelines of Obama's nuclear security summit, even if the meeting was unlikely to produce concrete results.

Most importantly, it seems that the atmospherics surrounding the bilateral U.S.-China relationship have improved, opening the door for movement on a number of issues, said China expert Drew Thompson of the Nixon Center in Washington.

A SHIFT IN POLICY

Foreign currency investors will scrutinize Obama's and Hu's words for evidence of a shift in Beijing's yuan policy. Analysts say a relaxation of the currency peg makes sense for China in the long term, but they do not expect significant changes in the immediate future.

A Chinese official in Washington characterized the two leaders' discussions as positive and constructive.

Chinese spokesman Ma Zhaoxu said Hu told Obama the two nations should properly resolve economic and trade frictions through consultations on an equal footing and jointly uphold the larger interests of China-US economic cooperation.

However, Xinhua news agency later reported Hu had told Obama that Beijing would firmly stick to its own path on the yuan.

Hu also noted that yuan appreciation would neither balance Sino-U.S. trade, now at a huge deficit in China's favor, nor solve the U.S. unemployment problem.

That stance was no surprise to analysts who say that public U.S. lecturing on the currency, and threats of punitive tariffs by lawmakers, only make China dig in against policy changes that even Chinese economists say are overdue.

The Chinese want the exchange rate change to be theirs, said economist Derek Scissors of the Heritage Foundation.

They are not going to do anything at all to tip it to the U.S. and thus give the impression of successful U.S. pressure. he said.

Xinhua quoted Hu as saying China wants to increase its U.S. imports, especially of high-tech products. Repeating a decade-old mantra from Beijing, Hu urged Washington to loosen its export controls of such goods, the agency said.

Obama must balance geopolitical considerations in dealing with China, America's largest foreign creditor, against the domestic imperative to show he cares about protecting jobs that U.S. lawmakers have deliberately linked to the yuan.

Monday's brief U.S.-China summit also covered Iran's nuclear ambitions -- a point of friction between Washington and Beijing that has shown signs of easing as the Chinese inch closer to a tougher approach sought by Western countries.

China and the United States share the same overall goal on the Iranian nuclear issue, said spokesman Ma in a statement that did not mention the sanctions Obama is seeking on Iran.

US JOBS

Politicians complain the value of the yuan is being held down against the dollar by Beijing to boost Chinese exports at the expense of U.S. exports, and thus jobs, and want Obama to take a hard line to push for China to allow it to appreciate.

The pressure comes from Obama's own Democrats as well as Republicans, with high U.S. unemployment likely to play a dominant role in November's mid-term congressional elections.

In a carefully nuanced message, Obama has said a more market-orientated yuan would provide an essential aid to global rebalancing, echoing the conclusion of the Group of 20 advanced and developing nations in Pittsburgh last September, which included China. He returned to that theme on Monday with Hu.

The president also noted his concern over some market-access issues, market-access barriers in China and the need to address them as part of the rebalancing effort, Bader said.

Beijing runs a massive $250 billion trade surplus with the United States.

Some U.S. critics claim this shows the currency is undervalued to give the country's export sector an unfair competitive edge, but Scissors and other economists say there are far more damaging Chinese subsidies and trade barriers to worry about.

Chinese officials say the yuan-dollar peg provided vital stability during the global financial crisis of 2008 and they have been reluctant to tinker with a formula that has kept China's factories in business during the global recession.

Recent signals from China have encouraged hopes that it was edging toward a more flexible yuan, which analysts say makes sense for China on its own merits regardless of any impact on U.S. trade.